In a market with a horizontal demand curve, demand is perfectly elastic, meaning consumers are very sensitive to price changes. If a per unit tax is levied, the producer would have to absorb the entire tax to maintain the price, as any increase in price would lead to a total loss of sales. This is because consumers have infinite alternatives and would switch if the price increased.

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Which Is True

Question 57

Multiple Choice

Which is true?

A) A per unit tax levied on the producer in an industry with a horizontal supply curve will be all paid by the producer.
B) A per unit tax levied in an industry with a horizontal demand curve will be all paid by the producer.
C) A producer never pays all of a per unit tax no matter what the market conditions.
D) A seller never pays all of a per unit tax no matter what the market conditions.

Correct Answer: